Bitcoin hit $4400 per coin this week in a frenzy that followed the splitting of its blockchain ledger between the legacy bitcoin and a new bitcoin Cash (BCC) cryptopcurrency (1). The price of bitcoin at the beginning of August was $2700 per coin. Five months ago the price was $1000 per coin. Pursuit of bitcoin has become a gold rush and irrational exuberance all rolled up in one frenzy.
While the price of cryptocurrency is underpinned by a substantial demand the for the anonymity and security featured by bitcoin and its brethren and those that invest in providing the computing infrastructure for bitcoin, (referred to as “miners”), the incredible increases in the exchange rate seem to be driven by large institutional players that have been speculating in both bitcoin and BCC (as well as in competing blockchain currencies such as Ethereum). And, as to be expected, recent exchange rate increases have also been driven by daytraders jumping on the bandwagon in a hope to participate in upcoming gains.
So, should we all be dumping our greenbacks for bitcoins and be virtually stuffing them into our mattresses? I’d hold off on that.
Why? Well, for one thing, because bitcoin and most other cryptocurrencies are not money. That’s right, bitcoin, because it has no intrinsic value, is a lousy medium of exchange, and is a dubious store of wealth. Instead, bitcoin is just a commodity. In fact the U.S. Internal Revenue Service says so. And in the case of virtual currencies like bitcoin, the Service has struck to the core of what they really are–mediums of exchange whose value is only what interested parties are willing to pay for them (2). And for now, most of those parties are speculators, criminals, terrorists, money launderers, anarchists, and fiscal libertarians.
What’s a bitcoin really worth? Well, what’s a bushel of Dutch tulip bulbs (3) really worth? For my money, I’ll take the tulips over bitcoin. At least I can get flowers in the spring if I bury the bulbs this fall.
(1) Financial geek side note on the difference between the bitcoin and BCC: the 1MB block size in the bitcoin ledger limits daily transactions to about 250,000, while BCC’s 8MB block size expands that daily limit to 2 million. The bitcoin / BCC fork was driven primarily by the concern in the increase in transaction wait times and fees for Bitcoin, which was driven by the daily transaction bottleneck.
(2) For those readers who are quick to point out that a fiat currency like the U.S. dollar has no intrinsic value either, I beg to differ…U.S. taxes can be paid with U.S. dollars… something that bitcoin or even gold cannot do, although gold has its own virtues unchallenged by cryptocurrencies like bitcoin.
(3) A tangential reference to the supposed Tulip Bubble of 1637, where prices of rare bulbs inflated and deflated sharply among the merchant classes of the United Provinces (modern day Netherlands).
9/13/17 update. JP Morgan Chase CEO Jamie Dimon calls bitcoin a fraud worse than tulip bulbs.